Thursday, January 1, 2009
Catherine Wilson, Bureau Chief
Toward A Financially
Last week was the 20th anniversary of the Pam Am 103 disaster over Lockerbie, Scotland. All 259 passengers and crew on the plane were killed
along with eleven members of that rural community. As one Lockerbie resident recalled “we didn’t have any trees, cards, we took them down and the decorations. And we sat and ate our dinner … we didn’t have a Christmas like, it was quite somber.” While fortunately no disaster of that magnitude has affected our area this year, local residents can still relate to the somber mood, a mood that is extremely evident this holiday season.
There are fewer outdoor decorations and displays on our neighbors’ lawns, fewer shoppers in the local stores, and more stories of hardship
and loss. The worsening mood will only serve to impact the economy further as area residents tighten their belts and sales drop in local businesses.
Even those unaffected by house foreclosures and job losses are still bracing for the impact in 2009.
So how should local residents prepare themselves for the tax hikes and cutbacks still to come? While there is no secret formula for surviving a
recession unscathed, there are several steps local residents can take to lessen the impact. Chief amongst them is to get all personal finances in order and establish a household budget to reduce and eliminate nonessential expenditures.
Budgeting is especially critical for wage-earners who own their own business or get paid on commission or other unpredictable schedules. Doing a budget does not require expensive computer software, technical or accounting skills. To aid area residents, several local colleges, libraries, senior centers, and community centers offer basic courses in how to do a household budget. Many of these courses are even geared to specific groups: small business owners, seniors, college-bound students, and women.
Westchester Community College is hosting several financial courses this Spring, amongst them Money Smarts for Women. Residents who are computer-literate can receive help online from a variety of sites and banks such as Microsoft Money at http://www.moneycentral.msn.com/. Both the classes and websites attempt to take individuals through the logistical basics of developing a budget. MSN promises a Five Minute Guide to Budgeting for those who are financially challenged: “The First step is figuring out where your money goes right now. Use an online worksheet or a plain old notebook to keep track of your spending for a few weeks. Go through your checkbook and credit card statements. Add up the amounts, and you’ll have a good idea about your spending habits”.
The easiest time to do this is when paying bills at the end of the month. Gather all of your bills and add up the amounts to see how much of your earnings are being spent each month. You’ll quickly notice patterns, some expenses are “fixed”, that is, the amount never changes from month to
month, such as rent, while other expenses are “variable”, the amounts due change each month, such as charges on a cell phone. Household expenses break down into even more specific patterns. Those costs which are “necessary”, such as housing, and those costs which represent “wants”, such as entertainment and vacation expenses.
One common misconception by individuals setting a budget is that all “necessary” costs must be “fixed” and all “wants” are “variable” and budget
accordingly. However, many “necessary” costs such as food can vary widely month to month depending upon the season and other factors. College students and family members returning home for the holidays will dramatically increase food expenses for many area homes this month. Similarly, many of our “wants” impose “fixed” constraints on our budget such as basic cable costs or magazine subscriptions.
MSN has many good tips on wading through the pile of bills. They list a few things to consider when establishing a budget:
• Consider that common budget categories include housing such as rent or mortgage, homeowner dues. There are also recurring bills such as cable,
utilities, insurance and credit card minimums; food and entertainment;
• Account for big expenses that occur once or twice a year, such as car insurance;
• Consider making your vehicle its own category. Payments are only the start;
• Let your categories fit your life. You might have expenses for school-related items such as tuition and books; also pet care or travel. If your hobby is your passion, make it a category.
That last “lifestyle” area can be a budget breaker, not because individuals spend money on their personal lives, but because they are not honest
about what is truly important to them. If a budget matches your lifestyle and desires, it will be easier to follow. Budgets should not only allocate
money to necessary expenses, but they should also set your personal goals so you can realize some reward for all your work, even if that reward is in the future, such as retirement, or a trip to visit family.
One measure used by financial planners and managers to set budgeting goals is the “hierarchy of needs” pyramid, a pyramid similar to the food
groups pyramid used by the FDA to establish nutrition guidelines, except this pyramid seeks to establish what our true needs are versus our wants
and desires. The classic psychological hierarchy of needs pyramid established air, food, water, security, employment, family, health, and property as the foundation layers, with friendship, intimacy, self-esteem, respect, creativity and morality higher up the chain.
When setting a household budget, individuals should establish their own hierarchy by ranking each bill according to their importance to them.
For most area residents the foundation of their budget may be their housing costs, but to those with severe health issues it may be medical costs.
Many financial planners insist on “paying yourself first” meaning individuals should set aside savings each month before any bills are paid, but to a family struggling with a health crisis, medical care for their loved one is first and foremost.
Therefore, it is important to realize up front that there is no “one size fits all” budget for every household since every situation is unique.
When sitting down with your bills at the end of the month, first set them into “necessities” and “wants” piles. Then rank each pile, including “wants”, according to their level of importance to you. By so doing, you may discover that you really cannot live without some of your “wants” and sacrificing those wants entirely will doom any budget you establish.
Your initial list might look something like this:
Mortgage, Heat, Water, Sewer, Property Taxes
Household maintenance & repairs
Health Insurance & Medical Costs
Loan payments (e.g. credit cards, equity line)
Commuting (e.g. Metro North tickets)
School Fees & tuition
Car Insurance & registrations
Car maintenance & Repairs
Retirement & other savings
The next step is to then determine your monthly income. That’s fairly easy for those who receive regular paychecks. But salespeople, local contractors, and business owners will have to estimate this figure, usually by looking at their 2008 income and judging accordingly – the last three months of this year may be a more realistic guide for 2009 income, than using all of 2008 as a base. Ideally, the amount of your income should exceed the total expenses you’ve ranked, but in today’s economy, this is often not the reality. So the next step for most area residents is to determine where to trim the costs and how to do it.
Since you’ve now ranked your bills, it’s easiest to start at the bottom. In the above example, eliminating or reducing magazine subscriptions would be a start. Moving up the ladder, entertainment costs can be reduced with some creativity, renting movies as opposed to going to a movie theater, getting music CD’s from the local library for free to download instead of incurring those $1.99 iPod charges which add up fast.
Each category of costs can be ranked even further. you may decide certain entertainment expenses outrank others. That monthly dinner with friends may be an important stress-reducer in your life, whereas another downloaded CD is not. However, where you meet for dinner can be altered to lower costs, or suggesting to your friends to skip the pre-dinner cocktails and after-dinner desserts, thereby concentrating on what you ranked as important – your friendship, not the meal!
Unfortunately, some unnecessary costs pose a unique problem since they “save face” for us, such as gifts. It may be difficult to admit to certain acquaintances and coworkers that we cannot afford to attend their weddings or contribute to the office party fund. Struggling to “keep up appearances” can wreak havoc with even the best budget, but ticking off the obtuse staff member next door could cause equal or worse havoc at work. Seeking out cooperative coworkers and family members to agree to purchase joint presents or forego gift-giving altogether will off-set the costs of those “keep the peace” presents. But pride is often the most expensive category in your budget; the trick is to determine exactly how much your pride costs you and is it worth it for what you receive in return?
That pride which is so prevalent in our suburban region even spills over into the more “necessary” costs such as cars, clothing, housing, and even
food. Working your way up your hierarchical pyramid, you can see how the type of car you drive, the brand names of the clothing you wear, the town you live in, and the food in your grocery cart, is what really determines whether you have available money on hand.
Ideally, necessary expenses such as food, clothing, and shelter should take up no more than 60% of your budget. Whether or not you have money
left over at the end of each month, if your basic costs exceed this percentage, you are probably living above your means. In addition, your total
debt payments, including mortgage, student loans, credit cards, equity lines, and car loans should not exceed 35% of your monthly income. If they
do, you need to analyze why you have been borrowing so much. And whether it was for necessities or wants?
As the Guardian reported in October, the blame for the current credit crises rests as much with the habits of many Main Street residents as it does
with the greed of Wall Street executives. It was flat-screen televisions, designer clothing, luxury vehicles, and video games that disseminated the
finances of many of our neighbors. The definitive book on the subject of possessions versus wealth is The Millionaire Next Door written by
two SUNY Albany professors, Thomas Stanley and William Danko, who analyzed where the true wealth is in our country for over twenty years.
Their surprising results? The real millionaires in our midst do not “own expensive clothes, watches, and other status artifacts”. Stanley and Danko refer to those who give off the appearance of wealth with status items as “big hat, no cattle” individuals. According to Stanley and Danko “We do not define wealthy, affluent, or rich in terms of material possessions.
Many people who display a high-consumption lifestyle have little or no investments, appreciable assets, income-producing assets, common
stocks, bonds, private businesses, oil/gas rights, or timber land. Conversely, those people who we define as being wealthy get much more pleasure from owning substantial amounts of appreciable assets than from displaying a high-consumption lifestyle”.
In short, name brands and status do not rank high on the budget pyramids of those who are truly wealthy – they buy their cars, homes, and clothes
based on function and quality, not based on labels and appearances. (The Westchester Library system has over 65 copies of this book available).
Stanley and Danko also determined that the level of an individual’s net worth (that is, all of your assets left after paying off all of your debts) does not correspond to true wealth. A person could have over $1,000,000 in net worth but not be wealthy if they are nearing retirement age and have a high income all along – their savings did not correlate to their earnings. Which explains why many local residents who are Wall Street executives are nervous – their lifestyles typically eat into their earnings at a far greater rate than those of their firefighter neighbors. They literally have less to show in relation to their labor.
Once you have eliminated or reduced your lowest ranked expenses, you should be left with the categories that are truly important to you. These
now need to be broken down further into very basic costs such as food, clothing, and shelter, and groups of costs such as health, insurance, and
transportation. By grouping expenses together, such as all transportation needs, you can see if you are overspending in one area. If your basic
costs of food, clothing, and shelter are 55% of your income (within the ideal 60% range, but your transportation costs exceed 20% of your income, your expenses are out of proportion.
Why does your car cost over 1/3 of what your home and food costs? Most people who do a household budget look at each individual line such as car loan payments and registration fees. But by grouping costs together into categories you can see where your financial priorities have been and if they make sense. You may have high car costs because you have a specialized vehicle to transport a handicapped individual. But you might also have high transportation costs since you’re driving a Ford Expedition that rarely sees more terrain than the road to the local train station.
Grouping together higher registration costs for luxury vehicles, more expensive repairs, insurance, maintenance, and higher payments for loans/leases may reveal that your car is almost as expensive to run as your home. Worse, unlike a home, a car usually loses a portion of its value every year as it ages, called depreciation, and eventually needs to be replaced, increasing its true costs even further. Once you have determined what expenses you have to live with, e.g. internet, yes; Sirius radio subscription, no; then you can then take the next step, fine-tuning those costs further. Look at your credit card and loan bills. Are you paying high interest rates? A call to the credit card company Customer Service department alone could lower your rate. Do you have sufficient insurance to protect you in these uncertain times?
Can you group your insurance with one company to obtain discounts? Is your home overvalued in relation to others nearby; check with your local tax assessor’s office and find out when their “appeal” day is. The assessor’s office will provide you with instructions on how to appeal if you believe you are being overcharged. Get on the email notification list now available from most towns such as Mt. Kisco and Mt. Pleasant.
Recent emails from Valhalla provided taxpayers with advance notice of the fire station’s budget before the town voted on it. Since local towns
will now have to absorb expenses that the County and State are cutting back, getting involved in the town’s budget and understanding what costs are being charged to you in your local taxes, is even more critical than ever. When looking at expenses in relation to income and to category of expense, one item stands out in this area, and that is property taxes. Westchester County property taxes are the highest in the nation. According to a survey conducted by Assemblywoman Sandy Galef, Democrat, 90th District, over 80% of local residents feel that what they pay in property taxes in relation to their income is unfair. Assemblywoman Galef has proposed a “circuit breaker” approach to these taxes, meaning the state
would set a maximum percentage of income that a household is expected to pay in property taxes.
But many towns and school districts are anticipating cutbacks in support from the County and State, so even if Galef ’s proposed legislation is
adopted in time for 2009, which is unlikely, any savings would be offset by increased local costs unless those costs are reduced.
Area residents need to insist that our local town and school districts scrutinize their budgets for possible savings. Even with support cutbacks, local residents should not be expected to make up the difference with increased taxes. Each town and school district should instead be negotiating concessions from their unions to offset the cutbacks, and each resident should be involved in the process to assure that maximum possible concessions are achieved.
As local budgets become available from our towns and school districts in the upcoming weeks, the Guardian will report on them accordingly.
But the first step for local residents is to understand the budget process. By starting with your own individual budgets you will not only get your own
house “in order” but you will be able to be a more effective voice in your community on your local budgets.
The forecast for 2009 may be bleak, but with education and planning, we can help ourselves and our communities survive the economic storm.
This reporter wishes all of our readers a safe, healthy, and financially prudent New Year.